What Small Business Owners Need to Know About the Expanded Employee Retention Credit Program

ERC Tax Experts Resources

April 10, 2023  |  9 min read

It’s safe to say that most small business owners around the country are still feeling the financial effects of COVID-19 and recovering from the impact of the pandemic. Yet one crucial source of financial aid is still being underutilized. The Employee Retention Tax Credit (ERC), implemented in March 2020, can benefit small businesses nationwide.

In this article, we’ll break down the timeline of the ERC, explain what small businesses need to know about its recent expansions and discuss the process of claiming the credit.

Why Many Small Businesses are Missing Out on the ERC

Despite the potential cost savings, many small businesses are unaware of the Employee Retention Credit. One reason is that small businesses may not know about the ERC credit or understand how it works. 

According to a survey by the National Federation of Independent Business (NFIB), only 36 percent of small business owners were familiar with the ERC, and only 8 percent claimed it in 2020. This lack of awareness is compounded by the fact that the tax code can be complex, and many small business owners may not have the expertise to navigate it.

Another factor may be a lack of communication between payroll companies and other service providers. The NFIB found that many of the small businesses that did claim the ERC relied on tax professionals and accounting software to help them through the process.

The ERC Timeline: What Small Businesses Need to Know

Congress implemented the ERC in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This tax credit was designed to help small businesses keep their employees on payroll during the pandemic. Fortunately, the ERC has been expanded and extended through 2021 to help more businesses recover. Also, the recent expansions of the ERC provide essential benefits to small businesses. 

The credit can now be used in addition to a Paycheck Protection Program (PPP) loan, which was impossible before; This means businesses can use both programs to help them stay afloat during the pandemic.

The Internal Revenue Service (IRS) has released a comparison chart that outlines the critical differences between the 2020 and 2021 versions of the program and provides information on several essential additions:

What are the Differences in the ERC from 2020 to 2021?

Initially, the 2020 ERC provided a tax credit of up to $5,000 per employee for businesses that were fully or partially suspended due to government orders related to COVID-19 or had a significant decline in gross receipts. The 2021 ERC was expanded to offer a tax credit of up to $28,000 per employee and includes more eligible businesses for the program.

The eligibility criteria for the 2021 ERC are also more relaxed, making it easier for businesses to qualify for the credit. For example, small businesses can now be eligible if they experienced a decline in gross receipts of at least 20 percent in any quarter of 2021 compared to the same quarter in 2019, as opposed to the 50 percent decline required in 2020. The maximum credit amount has also significantly increased from $5,000 per employee to $7,000 per quarter.

The Introduction of the Paid Leave Credit

In addition to the changes made to the ERC, the Paid Leave Credit is available to midsize and small businesses that offer paid leave to W2 employees who may take leave due to caregiving, illness, or quarantine.

Businesses can take dollar-for-dollar tax credits equal to wages up to $5,000 if they offer paid leave to quarantining or ill employees. Small business owners need to act quickly to take advantage of these changes. You’ll need to assess your eligibility for the ERC and submit your claims as soon as possible to avoid missing out on credit.

How Small Businesses Can Claim the ERC

Small businesses looking to reduce their tax burden and potentially receive a sizable refund should consider the ERC. However, understanding the eligibility criteria and how to calculate the credit amount can be challenging. This section will explore how small businesses can claim the ERC. 

Understanding the Eligibility of Small Businesses

Small businesses with 500 or fewer employees that have experienced a decline of 20 percent or more in gross receipts compared to the same quarter in 2019 are eligible to file for the 2021 tax credit retroactively. For a new small business, gross receipts for the initial operating quarter can be used as a benchmark. Small businesses compelled to close due to pandemic restrictions are also eligible for the tax credit.

If you’ve received PPP, you are still eligible for the ERC. Initially, the Employee Retention Credit prevented businesses that received funds through the Small Business Administration’s Paycheck Protection Program (PPP) from utilizing the ERC because PPP loans are forgivable as long as funds are used for payroll. However, under the American Rescue Plan, most small businesses, even those that obtained PPP loans, can now qualify for the credit.

Understanding Small Versus Large Businesses 

The difference between small and large employers for claiming the ERC lies in the definition of qualified wages. For small employers, all wages paid to employees, whether or not they worked, are considered qualified wages and can be used to calculate the ERC. However, large employers can only include wages paid to employees for not providing services as qualified wages.

Understanding the Eligibility of Employees

Eligibility of employees for the ERC depends on the number of full-time employees a company employs. Companies with 100 or fewer full-time employees are eligible for the ERC for all employees, regardless of whether they provide service during the designated period. 

However, for companies with over 100 employees, only full-time W2 employees who are being paid but not providing service due to shutdowns or a reduction in gross receipts are eligible.

Calculating Your ERC

Now that you know who’s eligible, it’s time to calculate your ERC. Eligible businesses can claim a refundable ERC credit against what they usually pay in Social Security tax on up to 70 percent of the “qualified wages” paid to employees. 

Factoring Qualified Wages

For 2021, qualified wages are those paid to all full-time employees during periods with a full or partial shutdown or a quarter with a decline in gross receipts. These qualified wages are limited to $10,000 per employee per quarter in 2021, meaning that the maximum ERC available is 70 percent of $10,000, or $7,000 per employee per quarter.

Here’s an example: Let’s say you run a restaurant that experienced a 20 percent reduction in gross receipts in Q1 2021 versus Q1 2019. In that case, you can request a tax credit of up to $7,000 per employee for the year’s first quarter. 

If the decline in gross receipts continued through the rest of the year, you could potentially claim the ERC for Q1 through Q3 of 2021. For a restaurant with 30 employees, the credit could be worth as much as $630,000 in 2021.

Recovery Start-up Businesses

Do you own a start-up business? For newly established businesses that began operations after February 15, 2020, and have less than $1 million in average revenue over the last three years, recovery start-up businesses are also eligible for the ERC. In addition, recovery start-ups do not need to show a decline in revenue or a suspension of operations to qualify for the credit.

Reporting Your ERC

To claim the ERC, eligible employers must report their total qualified wages and the related health insurance costs on their quarterly tax returns, using Form 941 for most employers. 

Qualified wages are those paid to an employee when the business was affected by a COVID-19-related shutdown or experienced a significant decline in gross receipts.

These wages can include all wages and compensation paid to employees, including tips, bonuses, and other forms of compensation. In addition to qualified wages, the employer can also claim the credit for the eligible health care expenses paid or incurred during the same period. 

Eligible health care expenses include amounts paid by the employer to provide and maintain group health plan coverage and charges paid by the employer for employee premiums.

Claim Your ERC Credit Today

The ERC has been a vital source of aid for small businesses affected by the pandemic. However, many businesses have failed to take advantage of this resource. The ERC timeline has been expanded and extended, making it easier for businesses to qualify for the credit. 

Small business owners should assess their eligibility and submit their claims promptly, as deadlines for retroactively filing for 2020 ERC funds are quickly approaching. At ERC Tax Experts, we can help businesses understand eligibility criteria, calculate their ERC, and start the application process to ensure they receive the credit they deserve. And because no one wants to wait up to a year for an IRS refund, within seven days of filing with ERC Tax Experts, we can even arrange for an advance payment of up to 70 percent of your total ERC refund payment. Begin the qualification process with ERC Tax Experts – today.

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